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November 27, 2013

Majority of Self-Employed Not Saving Regularly for Retirement

However, most say they’ll rely more on savings for retirement income than other sources

Self-employed workers might be setting themselves up for failure in retirement, a report released Tuesday by TD Ameritrade found. The “Self-Employment and Retirement Survey” found almost 70% of self-employed workers like contractors and entrepreneurs aren’t saving regularly for retirement.

Head Research conducted the survey for TD Ameritrade among over 2,000 self-employed and non-self-employed workers. The report found 40% say they don’t save on a regular basis, while 28% don’t save at all. By comparison, 12% of non-self-employed people say they don’t save regularly, and 10% aren’t saving at all.

Even as they’re neglecting to save, many expect to rely on those savings in retirement. Fifty-nine percent of respondents said they expected to live on their savings after they stop working, and 38% said they would rely on income from investments in their IRAs. Just 14% said they would rely on the income from selling their business for retirement funds.

TD Ameritrade referred to research from Economic Modeling Specialists Intl., a CareerBuilder company, that shows the number of self-employed workers in the United States has increased by more than 14% since 2001 to about 10 million. Of those, 30% are 55 or older, and more than 28% are between 45 and 54.

It’s possible that self-employed workers are struggling with the same obstacle many low-income and entry-level workers face. EMSI found the average annual income for self-employed workers is just under $27,000. The study seems to support this. Among all respondents, 31% acknowledged that it’s hard to save as much as they want, and 83% of people who are saving said they’ve had to cut back on savings for one reason or another.

Lule Demmissie, managing director of investment products and retirement services for TD Ameritrade, noted, however, that the EMSI is only part of the story.

“The median is riddled with outliers,” she said. “You could have a skew because there could be a chunk of self-employed workers that are way beyond that $27,000.” Low income does make it difficult to save, Demmissie acknowledged, but the variability of your salary is another factor. “If you’re making say $100,000 of $200,000 a year and you’re self-employed, it may not be coming at the same time. It may not be dripping, it could be feast or famine; that could also be just as hard, even if it’s not a low-income situation.”

Another contributing factor to self-employed workers’ low savings rates is what Demmissie called friction. “When you’re self-employed you’re going to have to set up your own IRA and one that is applicable to your situation. You don’t have some of the ease of implementation that a traditional employer has. All that adds up to what we call friction. It becomes friction for you not to do this.”

Another obstacle could be that they’ve set goals that seem too far out of reach, if they have one at all. The report found just 30% of self-employed and non-self-employed workers have a defined retirement goal. However, self-employed workers are aiming for a median $1 million, while non-self-employed workers’ median goal is just $725,000.

“Behavioral finance really works well here. One of the tenets of behavioral finance is make things easy and people will be more apt to do it.”

Among the small group of self-employed workers who are saving, easy and flexible plans are the most popular. More than 40% said they looked for one that “fit their circumstances.” A third said they wanted a plan that was easy to contribute to, and 36% wanted one that was easy to set up. Twenty-eight percent said they looked for a plan that would allow irregular contributions. Traditional savings and money-market accounts were used by almost half of respondents who save, while a third said they use a traditional IRA. Less than half of self-employed workers are even aware of individual 401(k)s.

“I don’t think the traditional workers skewed any wealthier or had more access [to advisors] than the self-employed. I think it’s as much situational as anything else.” She referred to self-employed workers’ high level of awareness of traditional IRAs. “My hypothesis is they may actually be people who were employed before in a traditional setting. They’re aware of these traditional things. The challenge is once you leave that traditional marketplace of employment, things that are applicable to you are different. For instance, now that I’m self-employed, maybe a SEP is more appropriate.”

Demmissie pointed out that small behaviors add up, so the high level of self-employed workers who aren’t saving regularly or at all is “disconcerting.” However, they’re not so far behind that they can’t begin to change.

“For a lot of these self-employed individuals, information is accessible,” Demmissie said. “Nobody is hiding the ball here. One of the things that’s important here is using the resources that are available. It’s not an unattainable first step to do that. This isn’t a doom-and-gloom, it’s an opportunity for more education and self-awareness.”

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